As Supercommittee Fails, Investors Will Pay the Price

by Jeff Reeves | November 20, 2011 9:16 pm

[1]How broken is government in Washington? So broken that Democrats and Republicans don’t even need to wait until the last minute to announce their failures. After all, it’s clearly a foregone conclusion — so why fake it?

The 12 members of the bipartisan congressional supercommittee given the task of finding spending cuts of $1.2 trillion admitted on Sunday night that they are heading for failure. As a result, the U.S. government and financial markets are wrapped in turmoil and uncertainty — again.

This shouldn’t be a surprise to anyone. I wrote last week why the supercommittee would fail[2], and how the market would sell off sharply as a result. I was hardly the first to say that, and it’s hardly news to anyone watching these so-called “negotiations” on Capitol Hill.

Almost single-handedly killing any compromise is a disagreement over taxes. Democrats are seeking tax increases on high earners while Republicans refuse to allow any substantive revenue to come from taxation and prefer to focus on spending cuts. To a lesser extent, entitlement programs such as Medicare have been a source of partisan bickering — but often as a talking point in the former fight about taxation.

One of the most disturbing developments is that $1.2 trillion in automatic, across-the-board cuts will hit federal budgets in 2013 and brutalize both Medicare and defense spending alike. The so-called “triggers” were meant to force goodwill negotiations, but failed miserably on that mark.

Congress could find a way to weasel out of these automatic cuts, of course. But their presence is noteworthy nonetheless.

Also important is the fact that these triggers were designed to spare the U.S. from another credit downgrade and may not even do that. S&P downgraded America’s sovereign debt rating from AAA to AA-plus in early August after grandstanding relating to the debt ceiling spooked global markets. Though a deal actually was forged in the end to avert default, a 500-point slide in the Dow Jones followed on the Monday after the S&P downgrade.

So, what does this mean for investors? Well, there’s a very real chance the markets could spiral downward on thin volume in the run-up to Thanksgiving. Check your stop losses, and if you’ve felt like a vulture circling choice companies that appear overbought … the next few days may be your big chance to buy in.

Stable dividend stocks such as utilities and tobacco stocks, in particular, have seemed like awfully crowded trades in 2011 as these companies have tacked on big share appreciation despite limited growth prospects. If you like these sectors, a pullback may be a good opportunity to do some holiday shopping for your portfolio.

Of course, to hear Mark Zandi of Moody’s tell it on Fox News Sunday, there’s a chance that this time around the antics in Washington may not result in a crash. “It’s all relative to expectations,” he told the program, adding that expectations “have been and are still very, very low.”

That kind of sentiment is pretty common, and is probably the saddest thing of all. Investors and voters undoubtedly have another 12 full months of this nonsense, and nothing is going to get done in Washington before Election Day 2012.

No, that’s not hyperbole. I literally mean nothing will get done.

It used to be that a divided Congress was good for the market and for businesses because it prevented crazy wingnuts on either side from gumming up the works. Crazy partisan schemes seemed to be reserved for when one side clearly held the upper hand and didn’t have to compromise at all. In a divided Congress, however, lawmakers should be smart enough to push that kind of behavior under the carpet to get things done — especially in times like these.

Nowadays, though, even in a divided government our elected officials refuse to compromise. That’s not just bad politics, that’s very bad for the American people.